The Lubbock Board of City Development has decided to ask the City Council to con

Question

The Lubbock Board of City Development has decided to ask the City Council to construct a tunnel under the snowcapped mountain range cast of downtown Lubbock so that out of town visitors can reach historic prairie dog town without becoming lost and ending up at the ski lift. This project is expected to have a first cost of $2,000,000 and an annual maintenance cost of $50,000. In addition, major repairs costing $250,000 will be required after 25 years and each 15 years thereafter. Use an interest rate of 12% and determine the capitalized cost of the project.

Explanation / Answer

CF0 = -$2M ANnula Maint = 50,000 Y25, -$250,000 Y40, -$150,000 Rate =12% 1. Consider Initial COst of $2M P0= -2,000,000 2. Recurring annual cost is 50,000 plus the equivalent annual of the 250,000 end of cycle cost Y25 & recurring cost of $150,000 every 15 Yrs starting from Y40 (25+15) A= - 50,000 - 250,000 (A|F, .12, 25) + 150,000(A/P, 12% ,15)*(1/0.12)*(P/F, 12%,40) ie A= -50000 - 250,000*0.0075 + 150,000*0.1468*(1/0.12)*0.0107 = $(49,912) 3. Capitalized Cost = -2,000,000+ ( -49,912/0.12) = $(2,415,933)

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